Different Stages of an audit, Corporate Governance - Assignment Example

Auditing Identify the different stages of an audit? An audit involves three stages: the risk assessment stage, the risk response stage, and the last stage of concluding and making a report about the audit. The risk assessment stage involves getting an understanding of the client, identification of risk factors and coming up with an audit strategy, and assessing the risk as well as materiality. The risk response stage involves carrying out tests of control and performing comprehensive substantive testing of accounts and transactions, with attention paid to where the material misstatement risk is highest. The reporting stage involves appraisal of the comprehensive testing results, taking into consideration the auditor’s understanding of the client coming up with a judgement regarding the fairness and truth of the financial report of the client. The auditor then prepares an audit report that reflects his or her opinion on the basis of the findings. Explain the process used in gaining an understanding of the client? Auditors gain an understanding of their client as part of the risk assessment process. The process of understanding the client involves considering issues at the organisation level, the industry level, and the wider economic level. At the organisation level, an auditor identifies the client’s key suppliers, customers and other stakeholders such as employees, banks, and shareholders. This involves looking at the nature of the client’s operations, such as provision of warranties to customers and the client’s level of innovation to make use of new technologies. At the industry level, auditors examine the client’s position vis-à-vis other players in the industry. At the economic level, auditors assess how well positioned the client is to deal with the current business environment, which includes issues such as changing government policies as well as economic conditions. Define fraud risk? Fraud is the deliberate action of obtaining an undeserved or illegal advantage by way of deception. Therefore, fraud risk is the possibility that a person or a group of people will be engaged in actions of obtaining undeserved or unlawful advantage through deception. There are two types of fraud, namely misappropriation of assets fraud and financial reporting fraud. Explain the going concern assumption? The going concern assumption is a presumption that is made on the basis that a firm will remain operational for the foreseeable future. Under the going concern assumption, valuation of assets is done based on the assumption that the assets will continue to be used in the operations of the business. As well, liabilities are documented and categorised as current and long-term based on the belief that clients will pay their debts when become due in the coming years. Describe corporate governance? Corporate governance can be defined as the system of controlling and overseeing the conduct of companies and of ensuring that there is a balance in the interests of all internal stakeholders and external stakeholders such as customers, local communities and the government. The aim of corporate governance is to make sure that companies exercise responsible behaviour, and by doing so, ensure that there is long-term and sustainable growth for firms. In other words, corporate governance is the system by which corporations are controlled and monitored to ensure that the corporations attain sustainable long-term growth and to strike a balance between the interests of the companies’ shareholders, management and stakeholders. Explain how a client’s information technology (IT) can affect risk? A client’s information technology (IT) can affect risk because of the manner in which the IT is used. Usually, companies use IT for carrying out transactions, recording information, and processing information among other uses. Risks related to IT can arise from unauthorised access to computers, data and software, errors in computer applications, loss of data, and lack of backup. For instance, unauthorised people can get access to information stored in a computer system due to inadequate security or due to instances such as theft of passwords. Computer malware can also be used to corrupt data and render it irrelevant. This can occur when an organisation’s computer system is not adequately protected against malware attacks. Malicious attacks of computer systems can also affect the information stored in the system and cause errors when the information is accessed, which causes a major risk for an organisation. Explain how client closing procedures can affect reported results? Client closing procedures can affect reported results in various ways. To start with, there may be significant slippage, which is a scenario in which the closing procedures are insufficient and transactions are not consistently recorded in the relevant reporting period. As well, the client may be under pressure to report the wrong results, thereby creating a risk that revenues that are earned after the end of a year will be considered as part of the income for the current year and expenditures incurred before the end of the year will not be included in the current period. Define audit risk? Audit risk is the danger that an auditor presents an improper audit opinion when a financial report is materially misstated. This implies that an auditor reports that in his or her view the financial report is fair and true, when in actual sense, the report contains fraud or errors. In other words, audit risk means the possibility that an auditor will issue an inappropriate opinion regarding a given set of financial statements. Describe the concept of materiality? Materiality means the capacity of information to have an influence on the decision-making process of users of a given set of financial information. That is, information is material if it has an impact on the decision-making processes of the people who use a given financial report. Materiality can be also defined as the magnitude of a misstatement or an omission in the financial statements that makes it possible that a rational person who relies on those financial statements would have made a decision due to influence by the omitted information or would have had a different opinion if the correct information had been provided. Describe how an auditor determines their audit strategy? An audit strategy sets the scope, timing and direction of an audit and also offers the foundation for coming up with a comprehensive audit plan. An auditor determines their audit strategy by undertaking the following: Determining the features of the engagement that define the scope of what needs to be done (e.g. the basis of reporting or the reporting requirements that are related to a particular industry). Establishing the reporting objectives that the audit needs to achieve (for instance the reporting time limits or key dates). Taking into consideration the key factors that will establish the areas that the audit team needs to focus on (for instance high-risk areas, materiality). Outline how clients measure performance? Clients measure the performance of an organisation by looking at the organisation’s key performance indicators (KPIs). KPIs vary between industries and from one organisation to another and hence, different clients will use different KPIs. In addition, it is possible that one client may use different KPIs for the same organisation in different years since KPIs change over the years as organisations change their business focus. Some of the KPIs that are commonly used by clients are a company’s profitability and liquidity. Profitability implies the capacity of a firm to earn profits. By relying on this measure, clients track the company’s expenses and revenue over time and measure any inconsistency. They will also make comparisons between revenues and expenditures of the firm’s close competitors and examine their capacity to compete. These details are also examined in reference to aspects such as economic downturns and seasonality to determine the correct position of a firm as regards profitability. Liquidity is the capacity of an organisation to pay its debts when they become due for payment. Clients will assess whether a company is able to pay its employees’ salaries, supplier bills, utility bills, interest on loans, shareholders’ dividends, and long-term debts. The more a company is in a better position to pay its debts, the more it can be perceived to be performing well. Describe how an auditor uses analytical procedures when planning an audit? Analytical procedures involve assessment of financial information by analysing reasonable correlations that exist among financial as well as non-financial information. The procedures entail identifying variations in accounts that are not consistent with the expectations of the auditor on the basis of how the auditor understands the client. When planning an audit, the auditor applies analytical procedures in order to understand the business and identify areas of potential risk. Applying analytical procedures may point out areas of the business that the auditor was not aware of and will help in determining the nature, timing and scope of other audit processes. Auditors also apply analytical procedures in planning by utilising financial as well as and non-financial information, for instance in determining the correlation between sales and the capacity of goods sold. Read More